Fannie, Freddie and the Financial Crisis: Phil Angelides

By Phil Angelides -
Aug 3, 2011

In the six months since the
Financial Crisis Inquiry Commission’s report was released,
a small band of critics -- with many Congressional
Republicans in tow -- has labored mightily to undermine the
credibility of the FCIC’s work. They have attacked the
report, even as its accuracy has withstood the scrutiny of
the financial industry, the media and others.

So why the assault? Part of the motivation undoubtedly
is to divert attention from the report’s stark account of
Wall Street recklessness and the failures of regulators and
policy makers. But another reason is that nine of the 10
commissioners -- including five Democrats, three
Republicans and one independent -- didn’t concur with the
detractors’ view that the crisis was primarily caused by
Fannie Mae and Freddie Mac, and the government’s housing
policies to which the two companies were subject.

Let’s set the record straight. The FCIC thoroughly
examined these two entities and their role in the crisis.
The report cites the government-sponsored enterprises
(GSEs) 759 times on 92 pages and the commission released
more than 140 documents that reference the GSEs. Despite
false claims to the contrary, the FCIC fully analyzed
information submitted by proponents of the theory that
government housing policies, Fannie Mae and Freddie Mac
drove the crisis. The analysis was included in the report
and on the commission’s website.

Misleading View

Specifically, the commission examined the claim that
more than two-thirds of all subprime and other risky
mortgages were held or guaranteed by the GSEs, government
agencies and banks subject to federal community lending
requirements. The FCIC found that view misleading, in no
small part because a commission staff analysis (see
attached) demonstrated that the assertion was based on a
deeply flawed definition of subprime and risky loans.

The faulty definition indiscriminately lumped together
mortgages securitized by Wall Street and those purchased or
backed by the GSEs, even though the loans of the
government-sponsored enterprises performed dramatically
better than mortgages packaged by Wall Street. In other
words, the detractors included in their definition millions
of home loans that don’t belong there.

The FCIC also looked in detail at the impact of
affordable housing goals set by the Department of Housing
and Urban Development for the GSEs’ mortgage business. The
commission found that, based on dozens of interviews and
documentary evidence, those goals contributed only
marginally to the GSEs’ participation in risky mortgages.

Disasters

It’s clear from the FCIC report that these companies
were disasters. They had a defective business model, in
which profits were privatized and losses socialized -- just
like what ultimately happened with most big Wall Street
firms. The government-sponsored enterprises used their
political power to ward off effective regulation, spending
$164 million on lobbying from 1999 to 2008. They ramped up
purchases and guarantees of risky mortgages starting in
2005 -- just as the housing market was peaking -- to regain
market share, meet investors’ and analysts’ expectations
for growth, and ensure lavish compensation for their
executives. And their failure has cost taxpayers more than
$138 billion to date.

Fool’s Gold

Disasters? Yes. The primary cause of the crisis? No.
And here’s why. First of all, the GSEs participated in the
expansion of subprime and other hazardous loans, but they
followed, rather than led, Wall Street in the rush for
fool’s gold. Their market share shrank to 37 percent in
2006 from 57 percent in 2003, as increasingly perilous
lending permeated the market. In search of profits, they
also purchased the highest-rated portions of “private
label” mortgage securities produced by Wall Street. While
such purchases added helium to the housing balloon, they
represented just 10.5 percent of “private label” subprime-
mortgage-backed securities in 2001, then rose to 40 percent
in 2004, and fell back to 28 percent in 2008. Private
investors gobbled up the lion’s share of those securities,
including the riskier portions.

Second, the FCIC analyzed the performance of roughly
25 million mortgages outstanding at the end of each year
from 2006 to 2009, and found that delinquency rates for the
loans that Fannie Mae and Freddie Mac purchased or
guaranteed were substantially lower than for mortgages
securitized by other financial firms. This holds true even
for loans to borrowers with similar credit scores or down
payments. For example, data compiled by the FCIC for a
subset of borrowers with scores below 660 shows that by the
end of 2008, far fewer GSE mortgages were seriously
delinquent than non-GSE securitized mortgages: 6.2 percent
versus 28.3 percent.

Finally, there is this simple fact: Fannie Mae and
Freddie Mac mortgage securities didn’t cause the losses
that cascaded through the financial system in 2007 and
2008, and that brought down firms such as Merrill Lynch,
Bear Stearns Cos., American International Group Inc. and
Lehman Brothers Holdings Inc. It just didn’t happen. GSE
mortgage securities essentially maintained their value
throughout the crisis largely due to the implicit
government backstop, while those created by other financial
firms crashed. Taxpayers have had to bear significant
costs, but GSE securities didn’t cause the big bank losses
that shook the system.

It has been almost three years since the near-collapse
of the financial markets. Every moment spent indulging
false arguments about the causes of the crisis is a moment
diverted from the urgent tasks still in front of us:
prosecuting violations of law to deter future wrongdoing;
enforcing new financial reforms; and remaking the financial
system from one of rampant speculation to one that helps
create jobs and genuine prosperity for the U.S. Enough is
enough.

(Phil Angelides served as chairman of the Financial
Crisis Inquiry Commission, which conducted the official
investigation into the nation’s financial and economic
crisis. The opinions expressed are his own.)

To contact the author of this article:
Phil Angelides at pa@angelides.com.